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The full text of selected cases

INLAND REVENUE

7. Case No. C.643/97

Mishandling of a taxpayer's liability to capital gains tax

7.1. Mr X complained that the Inland Revenue's delay in agreeing a valuation of shares which he had sold in a private company and their failure to properly advise him had prevented him from making a timeous formal election under section 96(5) of the Finance Act 1988 (FA 1988) affecting the capital gains tax (CGT) for which he would be liable, and that they had left his CGT position unresolved for a long period. He said that had rendered him 'technically bankrupt', thereby denying him the opportunity to start a new business and that he had been forced to incur considerable costs which had not been reimbursed. He also complained of delay by the Adjudicator and of her failure to properly consider his complaint to her against the Revenue.

7.2. My investigation began in March 1998, after the Ombudsman had obtained the comments of the Chairman of the Inland Revenue, and of the then Adjudicator, after the referral of the complaint by the Member. I have not put into this report every detail investigated by the Ombudsman's staff but I am satisfied that no matter of importance has been omitted. The main events relevant to Mr X's complaint are detailed in chronological order in Appendix A and the dates in my findings refer to that appendix. Appendix B lists the abbreviations used in this report and their meanings.

Statutory background

7.3. At the time of the events in question section 2 of the Capital Gains Tax Act 1979 (CGTA 1979) charged a person to CGT in respect of chargeable gains arising from a disposal of an asset in a tax year. Sections 96(1) and (2) of FA 1988 (now sections 35(1) and (2) of the Taxation of Capital Gains Act 1992 - TCGA 1992) provided that an asset held at 31 March 1982 and disposed of after 6 April 1988 should be treated for CGT purposes as though it had been disposed of on 31 March 1982 at its then market value and immediately reacquired. The general effect of that provision (termed re-basing) was to remove liability to CGT from gains which had accrued before 31 March 1982. Its application was, however, subject to additional legislation among which were sections 96(3) and (4) of FA 1988 (now sections 35(3) and (4) of TCGA 1992). Those sections determined that a test (termed the 'kink test') should be made before a re-based value was applied in a CGT computation. The test required that the gain or loss arising from the asset disposal in question should be computed by reference to the re-based 31 March 1982 value of the asset, and also by reference to its original base cost. The gains or losses computed under the two methods were compared to determine the gain which should be the chargeable gain or the loss which should be the allowable loss. The effect of those provisions was that re-basing to 31 March 1982 would not increase a chargeable gain or an allowable loss beyond what that gain or loss would have been when computed by reference to the original base cost of the asset. If, by reference to the re-based 31 March 1982 value of the asset there was a loss and by reference to the original base cost a gain, then the transaction concerned was treated as giving rise to neither a chargeable gain nor an allowable loss.

7.4. A taxpayer could, however, have elected under section 96(5) of FA 1988 (now section 35(5) of TCGA 1992) so that section 96(3) of FA 1988 did not apply in respect of disposals made by him (the election). The effect of making the election would normally have been that all assets owned by the taxpayer before 31 March 1982 acquired a re-based value and on their disposal the chargeable gain or allowable loss would have been computed solely by reference to that 31 March 1982 value without a kink test comparison to the original base cost. (The Revenue say that the legislation allowing the election was intended to provide a mechanism to relieve taxpayers of the need to keep records of their investments going back earlier than 31 March 1982 - thus hopefully simplifying CGT computations. In broad terms a possible benefit which could have arisen from an election would have been that an allowable loss would not have been restricted, as it otherwise would have been, to the loss as computed by reference to the original base cost were that loss to be less than the loss as computed by reference to a re-based 31 March 1982 valuation of the asset disposed of.) Section 96(6) of FA 1988 (now section 35(6) of TCGA 1992) provided that such an election was irrevocable and had to be made by notice to an Inspector at any time before 6 April 1990 or at any time during the period beginning with the day of the first relevant disposal and ending two years after the end of the tax year in which that disposal was made or at such later time as the Board of Inland Revenue (the Board) might allow. A booklet (CGT 14 - "Capital Gains Tax - An Introduction"), published by the Revenue in April 1989, said of the election that once made it could not be withdrawn and that if made it applied normally to all assets owned by a taxpayer at 31 March 1982. Another booklet produced by the Revenue (CGT 13 - "Capital Gains Tax - The Indexation Allowance for quoted shares") dated January 1989 said that if an asset disposed of had been acquired before 31 March 1982 its cost was to be taken as its market value at 31 March 1982 (with subsequent adjustment for indexation) but that there were special rules to ensure that the gain or loss since 1982 would not be greater than the gain or loss over the whole period of the asset's ownership. The latter booklet went on to say that a taxpayer could elect for those special rules not to apply. The election was irrevocable and if made applied to all assets. Both booklets suggested that a taxpayer should ask his tax office for details of the special rules and election but neither indicated a time limit within which an election had to be made.

7.5. The Revenue's internal guidance to their staff about the time limit for the election said that a late election could be accepted, on the authority of a District Inspector, where the delay in making the election resulted from events outside of a taxpayer's control, or any other reasonable cause, and the election was made within twelve months of the statutory time limit. Where a District Inspector proposed (for whatever reason) to reject a late election application the case had to be submitted to Head Office specialists.

7.6. The Head Office specialists have said, in connection with their consideration of Mr X's case, that although section 96(6) of FA 1988 gave the Board a discretion to extend the time limit for the making of an election (paragraph 7.4), because such an election was irrevocable they applied the same general criteria when considering an application for a late election under that section as they would apply when considering an application for a late election under other provisions in the Taxes Acts where there is no specific statutory reference in the relevant legislation to the Board's discretion over time limits. The Board's policy in this regard was set out in a written Parliamentary answer given on 10 December 1985. That answer said that

"... the number of cases in which it would be appropriate to exercise discretion ... is ... limited. Every such case has to be considered individually on its merits, and in the light of all the factors relevant to the circumstances in which the claim was made late. However, there would be a presumption in favour of admitting a late claim where there has been a relevant error on the part of the Inland Revenue, and the claim is made shortly after the error has been drawn to the taxpayer's attention; where a taxpayer has given clear notice of his intention to claim but before the time limit expires he has not ... completed any statutory requirement or specified the claim in sufficient detail; or where the reason for the delay in making the claim was clearly beyond the taxpayer's control (for example because he ... was seriously ill ...)."

7.7. Also at the time of the events in question section 85 of CGTA 1979 was potentially applicable where one company issued share capital to a person in exchange for share capital or debentures (loan stock) of another company. That section provided that the original and new holdings were to be treated as one asset. (An effect of that was that the exchange was not treated as creating a disposal for CGT purposes. Such an outcome can be described as a 'roll-over'.) Section 86 of CGTA 1979 provided similar roll-over treatment when, in a company reconstruction, a company issued shares to another company's shareholders whose original holdings were either retained or cancelled. Section 87 of CGTA 1979 provided that sections 85 and 86 were not applicable unless the exchange or reconstruction was for bona fide commercial reasons and was not part of a scheme for which the main or only purpose was the avoidance of tax. Section 88 of CGTA 1979 provided that section 87 did not apply where the Board, on written application by a company which was party to a transaction, had indicated their satisfaction with the transfer before it occurred. Section 703 (1) (b) of the Income and Corporation Taxes Act 1988 (ICTA 1988) said broadly that, when a person sold or bought shares and subsequently re-bought or sold back those shares and received an abnormal amount of dividend and a tax advantage as a result, the Board might make adjustments counteracting that advantage unless the person concerned was able to show that the transactions concerned were for bona fide commercial reasons and were not part of a scheme for which the main or only purpose was the avoidance of tax. Section 707(1) of ICTA 1988 provided for a taxpayer to seek a clearance from the Board that section 703(1)(b) did not apply to an intended transaction whose details were disclosed. Sections 87 of CGTA 1979 and 703 of ICTA 1988 are examples of what are generally known as 'anti-avoidance' provisions.

7.8. Guidance to Revenue staff at the time of the events in question said that where an Inspector was dissatisfied with any return of income and gains he could make an assessment to the best of his judgement if he had reason to believe that a chargeable gain might have accrued during the tax year. Where liability was known to exist but there was delay in providing computations or other information required for an agreed assessment, consideration should be given to making an estimated assessment as soon as was judged to be appropriate. The guidance to staff also said that all valuations of unquoted shares must be referred to the Revenue's Shares Valuation Division.

7.9. The Revenue's Code of Practice 1, 'Mistakes by the Inland Revenue' (COP 1), says that the Revenue aim to reply to enquiries or letters within 28 days and will tell the enquirer if they cannot achieve that target. When there is no good reason for their delay and they have taken more than six months over and above the normal 28 days' target, they will give up interest on unpaid tax during the period of their delay and will pay any reasonable costs which the taxpayer has incurred because of that delay. If there is no good reason for a series of delays on the same point and, exceptionally, the delay is more than two years in total, the Revenue will consider making a consolatory payment in addition to any other payments which they might make.

7.10. The Adjudicator's Office was created by the Revenue in 1993; it was then known as the Office of the Revenue Adjudicator. The Adjudicator's Office produces a booklet 'How to Complain about the Inland Revenue'. That booklet explains that the Adjudicator is not part of the Revenue's line management structure and that she makes independent recommendations on complaints which are put to her Office. The booklet also says that if the Adjudicator decides that a complaint is one that she can look at she will ask the Revenue for their views, obtain relevant papers and, once the facts of the case have been assembled, see if there is any scope for the Revenue and the complainant to come to an agreement between themselves. If either she thinks that seeking agreement is inappropriate or if agreement cannot be reached she will make a formal recommendation to the Revenue on how she thinks the complaint should be resolved. The booklet says that the Adjudicator tries to resolve complaints as quickly as possible and that complaints involving complex issues take longer to deal with than others, but the Adjudicator's Office will keep complainants informed of progress.

Jurisdiction

7.11. It is not for the Ombudsman to assess a taxpayer's liability to tax or to rule on claims for relief from tax. That is the responsibility in the first instance of an Inspector of Taxes and a taxpayer who is dissatisfied with the Inspector's decision can appeal to the General or Special Commissioners of Income Tax. Under section 5(2)(a) of the Parliamentary Commissioner Act 1967 (the 1967 Act) the Ombudsman is normally barred from investigating any matter in respect of which an aggrieved person has or had a right of appeal to such an independent tribunal. Under section 12(3) of the 1967 Act the Ombudsman is precluded from questioning the merits of a discretionary decision (such as that of the Board in refusing to allow a late election under section 96(5) of FA 1988) unless that decision has been accompanied by maladministration. My investigation has been confined to the Revenue's administrative handling of the tax affairs of the complainant.

Investigation

7.12. In outline, the events giving rise to Mr X's complaint are as follows. Mr X had been a director and shareholder of a company (which I call company A) since 1980. In 1988 Mr X was involved in negotiations for the sale of company A to another company (which I call company B). Before that sale took place solicitors acting for company A sought clearance from the Revenue under sections 88 of CGTA 1979 and 707(1) of ICTA 1988 (paragraph 7.7). Clearance was granted, and the sale went ahead in early 1989. The sale agreement was complex, involved a reorganisation of company A's share capital, and included provisions that consideration for the sale would be partly deferred. The quantum of that deferred element was subject to the future performance of company A. In early 1990 Mr X gave the tax office dealing with his affairs (the local office) details of the transactions, his valuation of the shares of company A he and his co-vendors had held at 31 March 1982 (paragraph 7.3), and he asked advice on how to proceed. The local office raised an estimated CGT assessment on Mr X, which he appealed, and told him that the chargeable gain arising for 1988/89 would be computed by reference to the initial consideration, the ascertainable value of the consideration deferred and an estimate of the value, at the date of disposal, of his right to receive profit-related deferred consideration. (Chargeable gains or allowable losses might arise in later tax years, were Mr X to dispose of shares of company B received in exchange for loan notes which were themselves received as part of the arrangements for the sale of company A.) Mr X was told that the right to receive future payments and the value of the shares at 31 March 1982 required valuation by Shares Valuation Division. He was told that questions concerning roll-over relief or deferment of charge should be considered when those valuations were known.

7.13. However, the local office sought advice not from Shares Valuation Division but from other Head Office specialists on the interpretation of the sale agreement. It was not until September 1992 that the local office told Mr X that the Revenue accepted that no tax other than CGT applied to the transactions (the Head Office specialists had considered whether liability to income tax under Schedule E might also have arisen). The local office then appreciated that necessary valuations from Shares Valuation Division had not been sought. In September 1993 the local office accepted Mr X's valuation proposals because historical information about company A was no longer available from Revenue files. Information contained in draft computations produced by Mr X showed that the deferred consideration which he had actually received was much less than had originally been expected. Subsequently the local office appreciated that Mr X had not made an election (paragraph 7.4). A late election was refused. (That decision had the effect of producing a no gain/no loss position on Mr X's disposals which would otherwise have given rise to allowable losses - the amount of those was estimated at the time by the local office at about £120,000. Subsequently the Revenue have told the Ombudsman that that figure was inaccurate and that Mr X's capital losses if a late election were to be accepted would be more likely to be about £45,000.)

7.14. Mr X complained about the Revenue's decision in January 1994. The local office said they were prepared, by way of compromise, "concessionally to allow as an allowable loss for CGT purposes, 50 per cent of the losses arising on the shares in [company A] computed by way of their 1982 valuation". Mr X complained to the Adjudicator who did not report her recommendations until August 1997. Mr X subsequently complained through the Member to the Ombudsman about that delay and what Mr X saw as the Revenue's earlier delay and mishandling of his tax affairs.

The Revenue's comments on the complaint

7.15. In giving the Ombudsman his comments on the complaint the Chairman of the Inland Revenue said that the underlying transaction in the case came within a category that CGT legislation treated as a reorganisation. The relevant legislation was mandatory and, provided certain conditions were met (paragraph 7.7), the effect was that there was no immediate charge to CGT on the reorganisation element of the sale transaction concerned. The relevant legislation included anti-avoidance provisions (paragraph 7.7). Taxpayers or their advisers could apply in advance for clearance from the Revenue that they would not invoke those provisions. A clearance application and its acceptance did not amount to the agreement of CGT computations however, nor did it amount to an agreement that no other taxation consequences would flow from the transaction concerned. In Mr X's case, the final element in the sale of company A had not been undertaken in the form for which clearance had been sought and obtained (see paragraph 7.16); it had only been very late in the day that the Revenue Head Office had become aware of that; and it was only in June 1992 that they had been able to give the local office their definitive views on the transaction concerned as it had actually been undertaken.

7.16. The Chairman accepted that the Revenue's handling of Mr X's potential CGT liability had been characterised by delays from start to finish. The local office had sought Head Office advice in April 1990, but it had not been until January 1991 that they had had any indication as to when a reply might be made. It was inexcusable that Mr X had not been kept informed of what was happening. No reply had been given to his letter of 27 March 1990 with which he had enclosed a payment on account of £25,000 and no explanation for the Head Office delay had been provided until February 1992. Understandably, Mr X had assumed that his CGT computation was being considered by Shares Valuation Division. That had not been the case. The sale of company A was one of several arrangements relating to company take-overs being looked into at that time by Head Office specialists. All those arrangements had involved a sale of shares for consideration which was unknown at the date of sale and which was to be dependent on the future results of the business purchased. Those arrangements had been structured in such a way as to avoid certain technical tax complications (which were later alleviated by the issue of an extra-statutory concession). As such, company A's sale had received a close scrutiny. But, in addition, company A's sale had raised further difficulties in that included in the arrangements had been a director who had not been an original shareholder. That had raised questions as to whether there was Schedule E liability not only in relation to that director but in respect of Mr X and his co-vendors. The matter had had to be considered by several Head Office specialist divisions before the Revenue had decided not to pursue the issue of Schedule E liability.

7.17. The Chairman also said that the local office had conveyed the Head Office specialists' apologies for the delays in February 1992. But by then there was a further difficulty. It appeared that Mr X had told the Revenue that he and a co-vendor had taken legal action against company B. That had led the Revenue to make a further request for information from Mr X which had again delayed matters. Mr X had in fact informed the local office on 30 September 1991 of a payment for damages he had received from his former employers and it would have been helpful if the local office had passed that information to the Head Office specialists to see if it affected the situation. After clarification of further points, the Head Office specialists had finally been able to provide the local office with full advice in June 1992. After writing to Mr X to explain the position in September 1992, the local office had run into difficulties in trying to obtain company A's trading accounts for 1982 so that papers could be submitted to Shares Valuation Division to allow a March 1982 valuation to be made. The trading accounts could not be found and, in order to settle an appeal which Mr X had made against his 1988/89 assessment without further delay, the local office had decided to accept Mr X's original figures for the valuation of the assets disposed of without seeking a specialist valuation. It had not been until September 1993, however, that the local office had been in a position to write to Mr X formally determining his appeal. Following the Adjudicator's recommendation, the regional office responsible for the local office had apologised to Mr X for the local office's delays. The Chairman added his own apologies for those delays. The Chairman said that a notice of an amended assessment for 1988/89 which had been sent to Mr X in September 1993 had omitted to show that he had previously made a payment on account of £25,000. It had not been until January 1995 that the overpayment was repaid to him in full with a supplement.

7.18. The Chairman said, however, that the Revenue did not think their delays had prevented Mr X from making a timeous rebasing election and he thought that they had been right to refuse to accept the application for a late election. The Chairman said that in 1988/89 Mr X had first disposed of an asset that he had held on 31 March 1982. He had therefore had until 5 April 1991 to elect that the kink test should not apply (paragraph 7.3), however he did not make that election until October 1993, some two and a half years after the time limit. The Revenue needed to consider whether in those circumstances to allow a late election under their discretionary powers. The Chairman said that in all areas of law involving the use of discretionary powers the Revenue would, in order to maintain consistency, normally operate by reference to general guidelines and, in cases such as Mr X's, consider a late election when a taxpayer had been prevented from making an election because of circumstances beyond his control, such as illness, absence abroad or serious domestic problems. The Chairman said that it seemed from Mr X's own valuation, which the Revenue had eventually accepted, that it would have been possible for him to have anticipated a loss when it first became clear that the eventual amount of the deferred consideration he was to receive was to be very much less than the maximum amount provided for in the sale agreement. That position seemed to have been reached in the middle of 1991 as evidenced by the copy of a solicitor's letter that Mr X had sent to the Revenue in March 1992. Mr X had therefore been in a position to make some judgement about the benefit of making an election some two years before he actually did so. Even if that were not the case, the Revenue did not think they would be right to exercise their discretion to accept the late election in his case. Such an election once made was irrevocable so that it could not be withdrawn even though it might turn out to be to the taxpayer's disadvantage. To allow a taxpayer whose tax affairs might be extremely complex to wait until he could be certain about all the consequences before making a decision about an election would defeat the object of the time limit. It would also be unfair to those taxpayers who had made the election in accordance with the time limit and who found at some later date that events had not worked to their advantage. The Chairman said that the Revenue would not disturb the decision by the local office to allow, concessionally, half the lost losses against future gains that Mr X might make even though, in reality, that conflicted with the time limit for making the rebasing election.

7.19. The Chairman also said that following the Adjudicator's report the Revenue had offered a payment of £50 to compensate Mr X for his direct costs arising from the Revenue's delay in refunding his overpaid CGT. He understood that Mr X was unhappy with that; he said an invitation made to Mr X by the regional office to let them have details of the actual costs he had incurred remained open. The Chairman added that it was unfortunate that the Revenue's delays had been compounded by delays at the Adjudicator's Office. He apologised for those and said that the Revenue had since made a consolatory payment of £300 in recognition (paragraph 7.9).

The comments of the Adjudicator on the complaint

7.20. The then Adjudicator in commenting upon Mr X's complaint in so far as it concerned her Office, said that her Office had acknowledged receipt of Mr X's complaint on 24 February 1994, saying in that letter that it might be some time before they got in touch with him again but inviting him to contact them if there was anything he would like them to do in the meantime. The officer dealing with the case had written to Mr X on 11 July 1994 to say that she had not yet started her investigation and was unable to say when that would commence. The case had been re-allocated to a new officer on 2 March 1995 who had written, on that day, to Mr X to tell him of that change and advise that she hoped to carry out her review within the next few months. The officer had completed her review and drafted a recommendation which she had passed to her case manager on 18 May 1995. There had then been a delay of over a year before the case manager had written to Mr X on 14 June 1996. At that time there had been a very large volume of work in the Office but the then Adjudicator said that there had been no excuse for such a long delay. She was very sorry for it. After a meeting in January 1997 Mr X and the Revenue had been kept informed of developments.

Findings

7.21. It will be useful first to summarise what has already been acknowledged. The Chairman has described the Revenue's handling of issues concerning Mr X's potential CGT liability as characterised by delays from start to finish. He has said it was inexcusable that Mr X had not been kept informed of what was happening (paragraph 7.16). The Head Office specialists and the regional office have apologised for the delays and the Chairman has added his own apologies (paragraph 7.17). The Chairman has also apologised for the delay in dealing with Mr X's complaint by the Adjudicator's Office (paragraph 7.19). The then Adjudicator expressed her regret for the delays by her Office (paragraph 7.20). The Revenue have made a consolatory payment of £300 in recognition of those delays and have offered a payment of £50 to compensate for any direct costs incurred by Mr X arising from their delay in refunding his overpaid CGT. The latter offer notwithstanding, the Chairman has renewed the Revenue's promise to consider details of Mr X's actual costs should he give those details.

7.22. Although Mr X's CGT liability raised complex issues, the delays by the Revenue in dealing with them and by the Adjudicator in dealing with his subsequent complaint were extreme and amounted to maladministration. Given though the apologies, regret and financial redress which have already been proffered (paragraph 7.21) does any injustice remain? Mr X considers that there does because he has not had the full benefit of the allowable CGT losses (paragraph 7.13) to which he would have been entitled had he - as he contends he would have done but for the Revenue's maladministration - been able to make a valid election (paragraph 7.4).

7.23. It is not for the Ombudsman to determine Mr X's CGT losses; nor is it for the Ombudsman to substitute his judgement for that of the Revenue in deciding whether or not Mr X made a timeous election or whether a late election should, under the exercise of discretion, be accepted (paragraph 7.11). The key issue for the Ombudsman is whether any maladministrative action or inaction by the Revenue tainted their decisions on Mr X's election.

7.24. I turn first to events prior to the sale of company A. The solicitors acting for that company had sought clearance under section 88 of CGTA 1979 and section 707 of ICTA 1988 that the Revenue would not invoke the anti-avoidance provisions of section 87 of CGTA 1979 and section 703 of ICTA 1988 (paragraph 7.7). I see nothing in the Revenue's response to the solicitors' request that went beyond the limited and specific terms of the clearance that had been sought (see 25 January 1989). I accept, as the Chairman has said, that a clearance application and its acceptance do not amount to an agreement to CGT computations nor do they amount to an agreement that no other taxation consequences will flow from transactions which have been the subject of the application. Insofar as Mr X might have misunderstood that point I do not see that as the fault of the Revenue.

7.25. After the sale of company A had taken place and following receipt of Mr X's tax return for the year ended 5 April 1989 (in which the section headed 'capital gains' had been completed "to be advised"), the local office corresponded with Mr X to try and obtain the information they needed to calculate his CGT liability. Mr X advised the local office that company A had been sold for £6 million. The local office made an estimated 1988/89 CGT assessment on Mr X in the sum of £950,000. That was a substantial assessment. Mr X has complained that the Revenue's actions rendered him 'technically bankrupt' (paragraph 7.1), perhaps meaning that the estimated liability assessed exceeded his personal assets. However, Mr X had a right of appeal and a right to apply for postponement of tax against that assessment both of which he exercised. In making the estimated assessment, the local office acted in accordance with Revenue instructions which then applied (paragraph 7.8). I do not see fault in their making that estimated assessment, but it was not until 14 September 1993 that it was amended to accord with Mr X's calculations and then on 19 January 1995 on the basis that no chargeable gain arose. Until September 1993 Mr X therefore had a large potential liability hanging over him; insofar as that arose through the Revenue's avoidable delay I criticise them for that (see paragraphs 7.27 and 7.28). That liability, however, because of Mr X's postponement application did not become an enforceable debt, nor was there ever anything more than a contingent possibility that there would be a final liability. While I accept that the uncertainty must have been unsettling for Mr X and a factor to be taken into account in his financial planning I do not see that that of itself prevented him from making business decisions.

7.26. Following correspondence, Mr X wrote to the local office on 27 March 1990 saying that he had discussed the CGT matter with his accountants; he believed he understood the local office's requirements, though he emphasised that he was unfamiliar with CGT. He set out his provisional calculations of liability, enclosed a payment on account of £25,000 and asked for advice on how to proceed. The local office did not reply to that letter and I criticise them for that. I return later to the consequences.

7.27. On 26 April 1990 the local office wrote to officer P at Head Office asking for guidance on the company A sale agreement. I do not question their decision to do so. The sale agreement was highly complex. Contrary to what Mr X might have believed there was nothing in the clearance applications which determined the taxation consequences for him of events connected with the sale of company A (paragraph 7.24). The local office made progress enquiries in September and December but when they spoke to officer P on 16 January 1991, almost nine months after they had requested guidance, she said that her post was being relocated and that a reply could not be expected for another six weeks. When officer Q, officer P's successor, had reviewed the case, he concluded that he needed to seek advice from other Head Office specialists. Again, I do not question that decision. The arrangements for the sale of company A raised wider issues. Although Head Office eventually decided that the CGT treatment proposed by Mr X could be accepted that does not make their consideration of the points they considered unnecessary. What does merit my strong criticism is that it took Head Office some two years and three months to reach that conclusion and advise the local office. Even worse was that throughout that time Mr X was under a justifiable misapprehension (as the Chairman has acknowledged - paragraph 7.16) that his papers were with Shares Valuation Division for them to make a valuation of his company A shares.

7.28. Having waited so long (until 24 June 1992) for an answer to their request from Head Office for guidance, the local office then took more than two months to write to Mr X. In their letter of 9 September they told Mr X that it was then accepted that there was 'no charge to tax other than CGT'. That comment understandably confused Mr X. The Revenue had made no suggestion to him (beyond perhaps an equally confusing message from officer Q - see 24 February 1992) that any tax other than CGT had been in issue. The local office also requested CGT computations. Mr X replied on 16 October saying that he had submitted a CGT return on 27 March 1990 and could not complete further returns until he had the Revenue's agreement to his first submitted return. The local office held a meeting with Mr X on 26 October 1992, but exhibited little urgency to finalise his CGT affairs. It took until 29 January 1993 for the local office to realise that a formal valuation of Mr X's company A shares as at 31 March 1982 still needed to be obtained. When the local office then obtained the Revenue file for company A they found that the 1982 trading accounts were absent. After trying to track those down without success they eventually decided to accept Mr X's valuation proposals. When, after a delay, on 9 September 1993 they gave him written confirmation of that they then asked for his CGT computation for the post 1988/89 tax years in respect of the gains arising from the deferred element of the sale agreement. They also amended the 1988/89 CGT assessment but erroneously omitted to show the £25,000 which Mr X had already paid on account in March 1990. I criticise the local office for that, and also more seriously for their delays and poor communication.

7.29. Mr X prepared his draft CGT computations and attended an interview at the local office on 7 October 1993. After all those accumulated delays at the local office and of Head Office that was some three and three quarter years after he had first requested, on 3 January 1990, the local office's advice on how to proceed. At the interview the local office told Mr X that he had not made an election and that that affected his CGT computations. The matter of an election was material because the consideration which Mr X actually received under the deferred element of the sale arrangement was much less than had originally been expected. A calculation of the CGT position by reference to the consideration received and a 31 March 1982 re-based cost using Mr X's (by then agreed) valuation produced substantial losses; a calculation by reference to the original (nominal) base cost of Mr X's company A shares produced a profit. In the absence of an election that led to an outcome where there was no chargeable gain and no allowable loss. Had there been an election the losses (estimated by the local office at £120,000 - but subsequently said by the Revenue to be about £45,000 - paragraph 7.13) would have been allowable. An election in October 1993 was out of time. (As Mr X's first relevant disposal was in the tax year 1988/89 he had had until 5 April 1991 to make a timeous election - paragraph 7.4.)

7.30. Mr X contended that an election had been implicit in the return of his CGT position he had made in January 1990, and had implicitly been acknowledged in the local office's letter of 2 March 1990. I do not see that. While their exchange referred to a valuation of assets at 31 March 1982 that of itself does not necessarily imply an election. A valuation of assets at a 31 March 1982 date was necessary in order to compute the gain or loss arising whether an election was to be made or not. The relevant legislation (paragraph 7.4) required an election to be made by giving notice to an Inspector. Mr X did not do that before October 1993, by when he was two and a half years out of time (paragraph 7.29). Accordingly I see no maladministration in the Revenue taking the view that Mr X had made no election before October 1993.

7.31. However, the legislation provided for the Board to admit a late election at their discretion (paragraph 7.4). Mr X made an application for a late election to be admitted (see 2 December 1993). Central to his request was his contention that an election would have been in time in 1990 but from March of that year until September 1993 matters had rested with the Revenue. Once the Revenue had agreed Mr X's valuation he had made an election. The lateness of the election had arisen, so Mr X claimed, because of the Revenue's gross delay. The Revenue, while acknowledging and apologising for their delay, did not accept that that had prevented Mr X from making an election. They chose not to exercise their discretion to allow the election but, by way of concession (see 14 January 1994), said that they would allow 50 per cent of the losses arising on the shares of company A computed by way of their 1982 valuation.

7.32. The Chairman has explained (paragraph 7.20) that an election is irrevocable. An election does not relate solely to assets which are subject to a particular disposal; it relates to all assets held at 31 March 1982 (paragraph 7.4). The legislation requires an election to be made within two years of the end of the year of assessment for the first relevant disposal. Taxpayers might very well have relevant assets, when that time limit expired, which remained unsold. For those assets it would never be possible for their owner, when considering whether to make a timely election, to be sure whether or not an election would be advantageous. I see it in principle as a matter for the Revenue that they chose to exercise the statutory discretion provided by section 96(6) of FA 1988 strictly and along similar lines to the consideration they give to other time limits where the statute did not itself provide for an exercise of their discretion (paragraph 7.6).

7.33. The Revenue's guidance to their staff said that a District Inspector had discretion, if there was reasonable cause, to accept an election made late if made within a year of the statutory time limit (paragraph 7.5). Mr X's election was well outside that so the District Inspector of the local office had no option but to do as he did and reject the application for an election and forward the papers to the Head Office specialists.

7.34. The Head Office specialists considered Mr X's application for a late election on 7 January 1994. Their expressed view was that Mr X had not been prevented (their emphasis) from making a timely election by some factor such as illness and that his late election should be refused. After Mr X had complained to the Adjudicator, the Head Office specialists considered the matter again on 9 February. They amplified their view saying that waiting for a formal agreed valuation in order to decide with hindsight whether to make an election did not satisfy the criteria for an extension of the time limit. They said that had Mr X made an election promptly in September 1992 (when he had been told that his potential liability was only to CGT) that a request would then have received favourable consideration. As he had not sought to make an election until October 1993 he had been unacceptably late. The Head Office specialists subsequently considered matters again on 15 April. They then expanded upon their earlier explanations referring to the criteria used to consider late elections, and specifically to the Parliamentary written answer of 10 December 1985 (paragraph 7.6).

7.35. Within the Parliamentary written answer is the statement that 'there would be a presumption in favour of admitting a late claim where there has been a relevant error on the part of the Inland Revenue, and the claim is made shortly after the error has been drawn to the taxpayer's attention'. Given that it seems to me that the crucial consideration when considering whether to accept Mr X's application for a late election should have been whether any error by the Revenue was a 'relevant error'. There is no indication that specific consideration was given to that point in the Head Office memoranda of 7 January and 9 February 1994. The point was mentioned in the 15 April memorandum. However, the view was expressed in that memorandum that if the Revenue conceded a late election to Mr X on account of the delays and confusion which had arisen in resolving his CGT position that would have been unfair to other taxpayers who had been refused late elections because they had not thought initially that an election would reduce their overall tax liability. In other words the Revenue's errors were not to put Mr X in a position different from that of those taxpayers who had omitted to make an election in the absence of Revenue error. I see that as a view which is contrary to the commitment given in the Parliamentary written answer where it seems plain that the intention was that those who had been subject to a relevant Revenue error should be in a category to be looked upon more favourably than those who had not. Given that, and the absence of earlier consideration of the role of the Revenue's error in delaying Mr X's election, I conclude that the exercise of the Revenue's discretion regarding Mr X's late election was flawed, amounting to maladministration.

7.36. In reaching that view I also take into account the conflicting views the Revenue have expressed of the point up to which a late election by Mr X might have been accepted. The Chairman has suggested that his expectation would have been that Mr X would have been in a position to have anticipated a loss around the middle of 1991 (paragraph 7.20), but Head Office suggested, in their memorandum of 9 February 1994, that it was as late as September 1992, when Mr X was told that the transactions involving him attracted only potential CGT liability, that favourable consideration would have been given to an election. I do not see it as evident that Mr X should have anticipated a loss in mid-1991. He certainly had reason then to conclude that his total consideration was likely to be much less than he had originally thought, but the extent or even the existence of any loss depended also on the deemed cost for CGT purposes of the assets he had disposed. While it is true that the Revenue eventually accepted his 31 March 1982 valuation they had given no indication that they would do that in mid-1991, in September 1992 or at any time up to September 1993.

7.37. What then of the relevance of the errors by the Revenue to the delay by Mr X in making his election? An aspect of Mr X's complaint is that the Revenue were in error in not advising him of the possibility of an election when he was still in time to make it. Mr X referred in his letter to the local office of 22 January 1990 to having sought information from booklet CGT 13. That booklet and the booklet CGT 14 (paragraph 7.4) refer to the election and its consequences. While neither booklet refers to the time limit for the election (as they might usefully have done) both suggest that the taxpayer should seek Revenue advice as required. Mr X therefore had advice on hand about the election while he was still in time. Given also that at that time the indications were that Mr X was likely to make significant chargeable gains rather than losses an election would not have been of clear benefit (paragraph 7.4). So I see no fault by the local office in not drawing the possibility of an election to Mr X's attention then, but that does not mean that the Revenue should be immune to the consequences of their continuing delay.

7.38. On 2 March 1990 the local office had written to Mr X saying that negotiations about the value of shares would be dealt with by Shares Valuation Division and suggesting that any questions concerning roll-over relief or deferment of charge should be considered when the valuations were known. Given that comment and the absence of a response to Mr X's letter of 27 March I see it as not unreasonable for Mr X to have concluded not only that the local office's subsequent referral to Head Office was to Shares Valuation Division but that all matters relating to his CGT liability were on hold until Shares Valuation Division had given their valuation. In his 27 March letter Mr X had said that he reserved the right to recalculate his CGT 'should the need arise'; he asked also for the local office to advise him how he might proceed. I see the local office's failure to respond to that letter as a serious and significant error that is relevant to the circumstances of Mr X's late claim for election. I see the failure to limit or qualify Mr X's expectation of a right to re-calculate his CGT 'should the need arise' as germane. In September 1993, as soon as the local office had told Mr X that they had accepted his valuation and requested his computations, matters crystallised and Mr X made his late application for election. Had the local office responded to the 27 March letter, kept Mr X informed, and requested computations for the post 1988/89 years I see reason to believe that Mr X would have made an election either within time, within the local office's discretionary twelve-month period (paragraph 7.5) or before September 1992 (see 9 February 1994).

7.39. I acknowledge that Mr X has been offered 50 per cent of the losses arising on the shares in company A computed by way of their 1982 valuation (see 14 January 1994). That is extra-statutory - there is no provision within the CGT legislation for a partial allowance of losses. While I do not criticise the Revenue for maintaining their concessionary offer I note that the local office suggested that compromise solution (as they saw it) in their submission of 22 December 1993 because of a view that the 31 March 1982 valuation they had agreed with Mr X was over-generous and that by allowing 50 per cent only of the losses a closer approximation could be reached to what the position would have been had a formal valuation been properly agreed. Whether or not that is so, the fact is that the local office had agreed Mr X's valuation and had chosen not to seek a valuation from Shares Valuation Division (which though understandable in view of the delay which had occurred was contrary to internal guidance - paragraph 7.8). Mr X had given his valuation to the Revenue; after great delay they had chosen to accept it without qualification. Any reservations the Revenue might have had about the valuation decision they had conceded should not have intruded into their later consideration of Mr X's late election. In view of all of those matters I asked the Chairman if he would look again at the decision to refuse Mr X's late election.

7.40. In reply the Chairman said that Mr X's case had been reconsidered. He still did not feel that it met any of the Revenue's normal criteria for the time limit for the election to be extended. Specifically:

a) there was no evidence that Mr X had given any indication, during the time allowed, that he intended to make an election; b) the Chairman did not consider that the delay in making the election had been beyond Mr X's control. Notwithstanding the Revenue's handling of his case, Mr X's circumstances had been similar to those of many other individuals who had had to decide whether or not to make an election before a valuation of the relevant assets was known or agreed;
c) the Chairman did not think that the Revenue had made a "relevant error" (paragraph 7.6). There had certainly been several mistakes in the Revenue's handling of Mr X's affairs, of which perhaps the most serious was their failure to reply to the letter of 27 March 1990. However, it was the Chairman's view that for an error to be a 'relevant error' it had to be directly relevant to the actual making of an election under section 96(5) of FA 1988. He did not see any of the Revenue's errors (which he regretted) as coming within that category.

7.41. However, the Chairman said that having regard to my findings at paragraph 7.38; the lack of information about time limits in the 1990 editions of booklets CGT 13 and CGT 14 (paragraphs 7.4 and 7.37); the Revenue's failure, even to date, to set out clearly the basis of the calculation of the losses to Mr X; and, perhaps most importantly, the offer made by the local office to allow a proportion of the losses (14 January 1994 refers) he had concluded that Mr X's case was exceptional, such as to warrant the exercise of a wider discretion. Accordingly, although the case fell outside the Revenue's established practice, the late election would be allowed. All of Mr X's capital gains/losses on all qualifying assets would therefore be calculated by reference to their open market value as at 31 March 1982.

7.42. The Chairman went on to explain that during the Revenue's latest review of the case it had become clear that they were not yet in a position to finalise Mr X's CGT position. He was very sorry to have to say that even now the Revenue would need more information from Mr X before a final figure for the losses could be agreed. It seemed likely though that that figure would be around £45,000 rather than the £120,000 originally estimated by the local office (paragraph 7.13).

7.43. The Chairman concluded by offering his unreserved apologies for the Revenue's handling of Mr X's CGT affairs, characterised as they had been by delay and uncertainty; he repeated the offer of £50 to compensate Mr X for his direct costs arising from the Revenue's delay in refunding his overpaid CGT, alternatively the offer to consider Mr X's actual costs remained open (paragraph 7.19); he agreed to consider a claim for any other costs Mr X could show he had actually incurred as a direct result of the Revenue and the Adjudicator's Office's delays and shortcomings; in addition he said that the Revenue would like to make a consolatory payment of £500 to Mr X to recognise the frustration and distress that he had suffered. (That payment would be additional to the £300 payment already made to recognise delays at the Adjudicator's Office.) The Chairman hoped that the Revenue would provide Mr X with a very much better service in the future.

7.44. I welcome the Chairman's decision that a wider discretion can be applied so as to allow Mr X's late election in the exceptional circumstances of his case. As to the consequences of that decision for the quantum of Mr X's losses, while I note that the Revenue think it likely that they will be less than the local office's estimate, they will be for the Revenue to agree with Mr X. (I note in passing that should Mr X fall to be assessed to CGT that any dispute about the quantum of losses allowable against such an assessment could be taken on appeal before the General or Special Commissioners - paragraph 7.11. It would be wrong, of course, for the Revenue to renege on any clear agreement that they may have given to Mr X on the quantum of the losses to which he would become entitled on acceptance of the late election.) I welcome too the Chairman's unreserved apologies; offer of a consolatory payment of £500; and offer of a further consideration of Mr X's costs. I see all of that as a suitable outcome to Mr X's largely justified complaint against the Revenue.

7.45. I turn finally to the handling of Mr X's complaint in the Adjudicator's Office. The delay that occurred there followed the Revenue's unfavourable decision on Mr X's late election. Coming as it did, immediately after the Revenue's long delay I can understand Mr X's anger and frustration. The then Adjudicator has said that there was no excuse for the long delay by her Office in investigating Mr X's complaint. The case manager accepted full responsibility and apologised personally on 9 January 1997. I welcome that but it still took another eight months before, on 8 August 1997, Mr X received the then Adjudicator's report. That was over three and a half years after Mr X had first written to her Office. That extreme delay, amounting to maladministration, I criticise. I welcome the apologies by the Chairman, the expression of regret by the then Adjudicator and the making of a consolatory payment of £300 in that regard. The present Adjudicator has said she wishes to be associated with those apologies. She said the service from her Office was well below the standard which Mr X was entitled to expect. She said that at the time Mr X's complaint was with her Office there appeared to have been a lack of a system to identify the type of delay that had occurred. She had checked that such a system was now in place; she hoped very much that there would be no repetition of the difficulty which had arisen. I see all that as a suitable outcome to that aspect of Mr X's complaint.

7.46. Mr X also complained that the then Adjudicator failed properly to consider his complaint against the Revenue. That the then Adjudicator came to a recommendation with which Mr X disagreed (or that in some respects I should come to a different view from her) does not mean that, the delay apart, I uphold that aspect of Mr X's complaint. The then Adjudicator and her staff took discretionary decisions about how they should consider Mr X's complaint and the courses of action and lines of enquiry they should pursue. Those discretionary decisions they were entitled to take and, the delay apart I do not see evidence of maladministration in their taking. That the outcome of my investigation has led to a different end result does not alter that.

Conclusion

7.47. I have largely upheld Mr X's complaint. I see the Revenue's decision to apply a wider discretion and allow the requested late election; to offer reimbursement of costs and a further consolatory payment of £500 (paragraph 7.43); and the Chairman's proffering of unreserved apologies, together with those of the Adjudicator and her predecessor, to be a satisfactory outcome.

APPENDIX A & B

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Last updated: 4 April 2005